U.S. stock indexes displayed an upward trend on Wednesday morning following the release of the latest consumer price index (CPI) data, indicating an uptick in inflation for August. This development has the potential to influence expectations regarding the Federal Reserve's forthcoming interest-rate policy.
Here's an overview of how major stock indexes were performing:
In contrast, the previous day saw the Dow industrials decline by 18 points (0.05%) to 34,646, the S&P 500 decrease by 0.6% to 4,462, and the Nasdaq drop by 1.04%.
The driving force behind these market movements can be attributed to the release of the U.S. consumer price index for August. This data revealed a 3.7% year-on-year increase in headline inflation, slightly surpassing Wall Street's forecast of 3.6%. The consumer price index, which assesses costs across a wide array of goods and services, experienced a notable 0.6% monthly surge, marking its most significant monthly rise in 14 months. Notably, even when excluding volatile energy and food prices, the core inflation, often referred to as "core CPI," rose by 0.3%, exceeding expectations of a 0.2% increase.
Vishal Khanduja, Co-head of Broad Markets Fixed Income at Morgan Stanley Investment Management, emphasized that the headline inflation reading was influenced by rising oil prices, with supercore inflation and core inflation showing less acceleration than market concerns had initially suggested.
Nigel Green, of deVere Group, a financial advisor and asset management firm, noted that while this CPI data is unlikely to impact the Fed's widely expected decision to maintain interest rates at their upcoming meeting next week (a decision already factored into financial markets), it does provide additional impetus for the central bank to adopt a more hawkish stance in the future. Accordingly, Green anticipates the Fed may begin preparing the market for a rate hike at its November meeting.
Market sentiment reflected in Fed funds futures traders showed a 97% probability of no interest-rate hikes during the Federal Reserve's upcoming policy meeting, with a 41% chance of a 25-basis-point hike at the November meeting, slightly higher than the previous day's assessment, as indicated by the CME Fed Watch Tool.
The yield on the 10-year Treasury note rose by 2 basis points to reach 4.283%, while the policy-sensitive 2-year Treasury saw a decrease of 2 basis points, settling at 5.007%.
Chris Zaccarelli, Chief Investment Officer at Independent Advisor Alliance, expressed disappointment over the 0.3% monthly rise in the core inflation rate, noting that it falls short of the ideal scenario investors had hoped for. Despite this, Zaccarelli believes that markets can still operate within a range, as inflation remains elevated enough to keep the Fed's options open, but not hot enough to shift away from the narrative that the Fed's policy adjustments are nearing completion.
Furthermore, Zaccarelli suggested that the stock market could experience a rally towards the end of the year, provided the economy maintains its resilience and inflation does not undergo a resurgence, particularly after navigating the traditionally weaker months of September and October.
Investors will also closely monitor the anticipated pricing of ARM Holdings' initial public offering later in the day. The valuation of the chip designer is estimated to reach up to $55 billion. A successful launch for this UK-based company could stimulate the IPO market, which often aligns with a broadly optimistic stock market sentiment.
Additionally, other U.S. economic updates, including the federal budget report for August, are scheduled for release at 2 p.m. This data will provide further insights into the current economic landscape.
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